Credit Cards Take From Poor, Give to the Rich

Credit cards appear to be the reverse Robin Hoods of the financial world.

A new paper from the Federal Reserve Bank of Boston says merchant fees and reward programs offered by many credit-card issuers essentially take money from those who have the least and give it to those who have the most. The imbalance may have to be remedied via government intervention, the authors, Scott Schuh, Oz Shy and Joana Stavins, argued. The paper was published as part of the bank’s Public Policy Discussion Papers on Monday.

Getty Images

Credit cards as a tool of inequality?

It comes amid big changes for the financial industry, as the nation’s bank regulators look to implement newly passed oversight overhaul legislation, some of which is aimed at protecting consumers from unfair credit-card practices.

The paper said that on average, households that use cash for purchases give $151 to those households that use credit cards annually. Meanwhile, card-using households get $1,482 from those who pay cash. The paper calls this a “regressive transfer” of wealth. At the heart of the issue is a lack of knowledge.

“The typical consumer is largely unaware of the full ramifications of paying for goods and services by credit card,” and is unaware how the fees merchants pay to offer payment by credit affects the setting of overall prices, the paper said.

While this system offers flexibility and options for card users, it simply raises prices for those who pay cash. The paper notes that while the percentage of households using credit cards has been relatively steady at around 75%, total consumer spending via cards has risen from 9% to 15% over the last two decades, increasing merchant fees.

The distortion of prices due to things like merchant fees is further exacerbated by the reward programs that are usually only available to those who spend more via credit cards, the researchers said.

The Boston Fed paper deemed its main contribution to the study of credit cards’ impact the researchers’ ability to sort out costs based on household income, going so far as to derive how much wealth is transferred between different groups. The paper also asserts that credit-card issuers aren’t out to gouge those who aren’t using their services.

“We do not allege or imply that banks or credit card companies have designed or operated the credit card market intentionally to produce a regressive transfer from low-income to high-income households,” the paper said.

That said, the paper said there is room for policy makers to act. “Income inequality” could merit “policy intervention in the credit card market” especially in light of the Fed’s newfound power to regulate debit-card fees, coming as part of the regulatory overhaul laws.

The authors said regulators could mandate more openness about merchant fees, or merchants could be allowed to adjust prices based on whether payment comes via cash or credit. Most credit cards now forbid that sort of pricing. The researchers also said tax policies could help offset the imbalances faced by low-income households.

About Real Time Economics

Real Time Economics offers exclusive news, analysis and commentary on the U.S. and global economy, central bank policy and economics. Send news items, comments and questions to the editors and reporters below or email realtimeeconomics@wsj.com.